This paper investigates the functioning of regional labour markets in Italy and Germany for different employee groups and regions. We derive theoretical hypotheses on group specific correlations between regional unemployment and individual wages distinguishing between regions. Using micro data matched to local unemployment rates, we specify and empirically test wage equations. For Italy we find no evidence in favour of a relationship between wages and local unemployment. In Germany results appear to be sensitive to model specification and type of employees. In both countries, the reaction of wages to local unemployment varies significantly along the wage distribution, being more sensitive around median quantiles.